The effect of AI investment announcements on adopting companies abnormal returns: A critical analysis of the UK market

Abstract

While artificial intelligence (AI) has become increasingly prevalent, empirical evidence on its impact on firm value is limited. This inaugural UK market study uses event study methodology to assess stock market reactions to AI investment announcements by FTSE 100 companies from 2019-2023. Analysing 138 announcements from 53 companies, the research reveals that AI investments have a marginally positive, but statistically insignificant impact of 0.114% on the announcement day, affirmed by both parametric and non-parametric tests. Further subsample analysis shows that high credit rating firms and early adopters experience significantly negative impacts on firm value, indicating investor risk-aversion and tentative evidence of a second-mover advantage. Cross-sectional analysis demonstrates that industry and the type of AI investment critically influence returns, and confirms the size effect with larger firms experiencing more negative returns than smaller ones. Earnings before interest, taxes and amortization (EBITDA) margins and cyber risk ratings, however, do not significantly impact returns. This study advances AI literature by examining market dynamics associated with AI investments, providing a foundation for future research, and providing practical insights for investors and corporate managers aiming to maximize risk-adjusted returns and firm value.